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Abercrombie Still Underperform

We retain Abercrombie & Fitch Co. (ANF) on our Underperform list, given the company’s continued weak sales and comps performance in the third quarter of 2013. The stock currently carries a Zacks Rank #5 (Strong Sell)

Why Underperform?

Abercrombie & Fitch posted disappointing sales results in third-quarter 2013, marking lower-than-expected top-line results for the fourth consecutive quarter. The company’s sales for the quarter declined 11.3% year over year to $1,033.3 million, while it missed the Zacks Consensus Estimate of $1,035.0 million. Weak third-quarter sales resulted mainly from poor performance in the domestic market as well as continued weakness in the overall spending among youngsters.

Moreover, Abercrombie’s comps performance depicts a downward trend, with negative comps results for the trailing 7 quarters. Further, the company is expecting comps to fall in the low double-digit range for the upcoming quarter.

Though the company is aggressively implementing strategies to overcome the downward sales trend, we do not see any meaningful improvement in the near term, as evident from the company’s negative comps guidance for the fourth quarter.

A significant portion of the company’s merchandise is manufactured overseas, in countries like Asia, and Central and South America. Further, international operations account for over one-fourth of the company’s revenue, thus, exposing the company to the political, social and economic risks of operating beyond national borders. This, along with foreign currency fluctuations, may adversely affect the company’s results.

Alongside, we believe that the company’s over-dependence on outside suppliers, intense competition from discount retailers as well as the seasonality of its business may undermine growth prospects.

Other Stocks That Warrant a Look

While we prefer to avoid Abercrombie & Fitch until we see signs of improvement in the company's performance, other retailers worth a look are Hanesbrands Inc. (HBI), Quiksilver Inc. (ZQK) and Michael Kors Holdings Limited (KORS). Of these, Hanesbrands has a Zacks Rank #1 (Strong Buy), while Quicksilver and Michael Kors carry a Zacks Rank #2 (Buy).